Is glut the only factor pulling oil prices down?

FXStreet (Mumbai) - According to the International Energy Agency, the oil price plunge since June 2014 has reduced OPEC revenue by nearly $500 billion a year. The market share strategy championed by Saudi Arabia was announced by OPEC in November 2014. Oil rich Saudi Arabia with the objective of pushing American shale oil producers out of the market, abandoned its policy of reducing supplies to stabilize price. The OPEC at the behest of Saudi Arabia and few other rich oil producing nations decided to increase production to defend market share rather then cut output to prop up prices. The resulting glut played havoc on the oil price.

The collapse in oil prices that led to reduction in OPEC’s revenue has hurt less affluent OPEC members like Algeria, Angola, Ecuador, Nigeria and Venezuela. Venezuela's oil minister has warned that oil price could touch as low as $25 if OPEC does not stop pumping. Ecuador's oil minister reiterated that the only way to strike a balance is to cut production.

OPEC members are gathering in Vienna on December 4 to decide on output. OPEC is unlikely to decide on cutting output at the meeting if the non-OPEC members refuse to tread similar line. Non-OPEC countries have so far refused to cut output.

Paris attack and its impact on oil price

Demand for gasoline and jet fuel will likely witness a drop as more people might be discouraged to travel in the upcoming holiday season. Be oil prices to hit further as business owners continue to fear that demands will drop.

Oil supply from Syria will be impacted if the Western coalition begins targeting IS-run oil fields and refineries in response to the attack. Also, the oil supply and price will be further affected if NATO allies go to war against the IS in Iraq and Syria. ISIS too might disrupt the flow of oil if it attacks Saudi or Iraqi oil production or shipping in the Suez Canal. This rising geo-political tension might actually work in favour of raising oil prices as they will disrupt supply to some extent.

Middle-east crisis and oil price.

Amrita Sen from Energy Aspects believes that current situation in the middle ease has caused sentiment to be bearish. This bearish sentiment, she says will further hurt demand and in the process cause oil price to fall.
Decline in oil prices has led to a sharp deterioration in fiscal balances of oil exporters. The fall in prices will lead to revenue losses for the oil exporters.

Fiscal deficits are still expected to average nearly 13 per cent of GDP in oil-exporting countries this fiscal. The International Monetary Fund warned that oil producing countries will take several years to recover the losses incurred from the sharp fall in oil price.
Saudi Arabia is however adamant. Saudi Arabia and some its rich neighbors who are in a better position to withstand the losses have refused to budge. This has led the smaller and more disgruntled OPEC producers to oppose the policy of retaining market share.

Oil price is not being hurt by over production alone

It is true that oil prices have slumped ever since OPEC embarked on the strategy to pump more. However, it is unlikely that cutting output alone will lead to a more sustainable recovery of oil prices given the influence of other dominating factors such as the China slowdown.
According to HSBC Holding Plc’s Senior Economic Adviser Stephen King, the surprises to oil prices over the last 15-20 years, they closely correlate to the waxing and waning of the Chinese economy”.

King opined that it is not just the supply side which is hurting price. He believes the China’s slowdown to be the biggest influence that is restricting oil price rise. China has slowdown considerably with the economy expected to expand only 6.5 per cent. The slowing economy clubbed with over supply has made it extremely difficult for oil producers to defend their share of sales in the country.

To justify his point that increase in supply is not completely responsible for the price slump, King has given an example of Saudi Arabia cutting output in 1980s. The world’s biggest oil exporter, Saudi Arabia had cut output in the mid-to-late 1980s. Prices however had not moved up.
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